More than £18bn has been invested in government bonds over the past year as investors eyed soaring yields, according to latest data.
Data from Morningstar, the investment data and research company, shows that a net £18.69bn has been invested in UK government bond funds and US government bond funds since November last year.
Some £5.97bn was invested into funds that invested in government bonds denominated in sterling, while £12.71bn was pumped into those denominated in the US dollar.
Rising yields are likely behind the increased popularity.
“Government bond yields have continued to rise over the last year due to central bank interest rate increases,” said Hal Cook, investment analyst at Hargreaves Lansdown.
Government bonds have gone from being extremely overvalued to attractively valued.James Klempster, Liontrust"Yields have not been at this level since 2008, meaning that on a forward-looking basis, these bonds are offering higher annualised nominal returns than at any point since then.”
The UK 10-year gilt yield was around 3.25 per cent last November, but is now just over 4 per cent, having peaked at around 4.75 per cent in August.
The US 10-year Treasury yield is now about 4.25 per cent, down from a peak of about 5 per cent in October but higher than the 3.6 per cent it was this time last year.
James Klempster, deputy head of multi-asset at Liontrust, said: “Very simply, government bonds have gone from being extremely overvalued to attractively valued.
“The levels of income may not offer the immediate prospect of a real yield, but they are dramatically more attractive than recently.
"It is not often in the history of fixed income that we can refer to these sorts of yield increases over only a couple of years.”
Economic indicators
On top of high yields, the bond market appears particularly attractive at the moment because economic indicators suggest interest rates may not move much higher.
The Bank of England’s bank rate has been held at 5.25 per cent since August, and the central bank’s Monetary Policy Committee is expected to keep it at 5.25 per cent in its meeting this week (December 14).
The central bank across the pond has behaved similarly. The Federal Reserve has held its target rate at a 22-year high of 5.25 to 5.5 per cent, and is also expected to hold rates.
Inflation figures have also come in lower than expected, causing the markets to predict that rate cuts will come sooner than anticipated.
For example, markets are pricing in that rates will begin to fall in the US and Eurozone in the spring, and are likely to be a full 1.25 percentage points lower by the end of the year.
In the UK, rate cuts are expected to start in the early summer and fall from 5.25 per cent to 4.5 per cent.
I think it’s more likely that bond yields will be lower rather than higher.Hal Cook, Hargreaves LansdownFalling rates is good news for existing bond holders — those that invest in government bonds today should do well should the expected play out.
This is because bond prices and yields have an inverse relationship, so as yields fall, prices should rise, and investors should benefit.
“The journey over the next 12 months is hard to predict because it is largely dependent on interest rates, which in turn, is largely dependent on what happens with inflation,” said Cook.
“There is likely to be volatility in government bond prices, but in 12 months’ time, I think it’s more likely that bond yields will be lower rather than higher, meaning investors will be more likely to see a capital gain than a loss.”
The Morningstar data also showed net flows for corporate bond funds over the past year.
This amounted to £6.7bn in total, with £5.1bn pumped into UK-based corporate bond funds and £1.52bn into their US counterparts.
Imogen Tew is a freelance financial journalist
